(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By Jeff Glekin
MUMBAI (Reuters Breakingviews) - Vedanta, the India-focused FTSE 100 mining group, is simplifying itself. There are sound commercial gains to be made in the process, but doubts linger about whether the assets are being transferred at equitable values. To get the deal done, Indian investors may need a bit more of the pie.
The potential gains are substantial. First there's a $200 million a year saving to be had from tax efficiencies that will come from combining the loss making Vedanta Aluminium (VAL) with Vedanta's cash-positive Indian businesses. Second, the newly structure will be better placed to service debt because the borrowings will be more closely matched with the operating assets. The transfer of $5.9 billion in debt from the thinly capitalised parent to the new Indian holding company, will be achieved in return for its stake in Cairn India. Third, Vedanta will create a broader business with ferrous and non-ferrous interests under the same umbrella. That will give it a shape more similar to other global mining firms like BHP and Rio Tinto.
But there are problems and shareholders are hardly expressing unalloyed joy. Shares in Sesa Goa, one of the as-yet-unreorganised Indian subsidiaries, fell sharply as the deal was unveiled and shares in its sister, Sterlite Industries rose only modestly. One of the main gripes centres on is the transfer of Vedanta Aluminium (VAL). The London-listed parent wants to reduce its overall holding in VAL from 87.6 percent to 58.3 percent, the remainder being picked up by minority shareholders of Sesa Sterlite, the putative name of the new operating subsidiary. Vedanta values VAL at $473 million, but Indian brokerage HDFC has said it expected a zero cost transfer. A report by Kotak is even more scathing. It thinks VAL has a negative equity value of around $2.7 billion.
Concern that Sesa and Sterlite investors will object to the terms and block the deal also explains the muted response in the London-listed shares. Moreover, there is a risk that the execution of the deal will expose corporate governance weaknesses. Vedanta will show strength in corporate governance if it ensures that the restructuring gains are fairly shared. A more modest valuation of VAL could help bring all investors on board.
-- UK-listed Vedanta Resources plans to simplify its structure by placing all but one of its subsidiaries under a single umbrella. It is part of an effort to cut costs, improve access to cash and reduce the India-focused miner's debt burden, the company said on February 25.
-- Vedanta currently has a network with over a dozen units, none fully owned and several separately listed, producing power and commodities from oil and gas to iron ore.
-- Vedanta plans to merge its two Indian-listed firms -- Sesa Goa and Sterlite Industries. It will also transfer its 70 percent stake in unlisted Vedanta Aluminium to Sterlite at a valuation of $473 million and consolidate another unlisted firm, MACLO, to Sesa Sterlite at a valuation of $363 million. In addition, Vedanta will transfer its 38.8 percent stake in Cairn India, the oil venture, to a wholly owned subsidiary of Sesa Goa for a nominal US$1. In doing so the debt associated with Cairn India of $5.9 billion will be transferred to Sesa Sterlite which in turn will hold a 58.8 percent stake in Cairn India.
-- The deal needs approval from 75 percent of shareholders; it also requires regulatory clearance in the UK and India.
(Editing by Robert Cole and David Evans)
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